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Bank reserve hike caveat

(China Daily/Agencies)
Updated: 2008-07-18 08:53

The banking regulator has told policymakers that forcing banks to increase reserves has hurt the industry's ability to repay debt, according to a source.

The People's Bank of China raised its reserve ratio requirement to a record 17.5 percent last month to rein in loan growth and inflation. The China Banking Regulatory Commission (CBRC) has warned against ordering further increases, said the source, who declined to be identified.

China's push to remove funds from the banking system resulted in the slowest loan growth in more than two years last month. The risk is that more banks will fall below the minimum requirement for short-term financial strength, the source said.

"While helping to control liquidity, further reserve requirement ratio hikes run the risk of repressing the financial system," wrote Sun Mingchun, a Hong Kong-based economist at Lehman Brothers Holdings Inc, in a July 15 note to clients. China may be approaching "the limit where further hikes do more harm than good", he said.

CBRC's recommendations were sent to the State Council, the source said. The State radio said on Tuesday that the nation needs a "tight" monetary policy, citing the legislature's Financial and Economic Affairs Committee.

The central bank has boosted the reserve ratio requirement by 3 percentage points this year, freezing up an estimated 1.3 trillion yuan of bank funds. It has left interest rates unchanged after six increases in 2007.

Lehman's Sun forecast the reserve ratio will rise by another 2.5 percentage points this year.

The number of Chinese banking institutions whose liquidity ratio, a measure of ability to meet short-term funding needs, had dropped below the 25 percent regulatory minimum increased by 85 to 392 in the five months to May 31, the source said.

The so-called excess reserve ratio - the share of bank deposits that lenders voluntarily lodge with the central bank in addition to required reserves - dropped to 1.95 percent in June, the lowest since at least 2001, reflecting the strain on banks' finances, according to Sun.

In addition, China's export-driven economic expansion is cooling as weaker US and European economies curtails demand. Gross domestic product rose 10.1 percent in the second quarter, the slowest since 2005, the statistics bureau said.